GERMANY Law and Practice Contributed by: Carsten Berrar, Florian Späth and Heiko Blaut, Sullivan & Cromwell LLP
such as a new financing round, typically serves as an inflection point for discussions. 3.3 Investment Structure Apart from common stock, typically earmarked for founders and initial investors, the following instruments are frequently observed in German VC transactions: • Convertible loans serve as the primary “pre-seed” -type of funding instrument in the German VC market. SAFE (Simple Agree - ment for Future Equity) agreements (a financ - ing instrument popularised by incubator Y Combinator in the US) do not offer investors any significant advantages over convertible loans and come up against legal challenges, such as uncertainty associated with the issuance of “naked warrants” in a German stock corporation ( Aktiengesellschaft , or AG)/European company ( Societas Europaea , or SE), and lack of viability of “automatic” conversion (since capital increases are not actioned by the management but require the explicit consent of the company’s sharehold - ers, by means of a formal resolution) cannot be addressed in a straightforward manner. As founders may, however, favour SAFEs over convertibles due to the absence of repayment claims and accruing interest, etc, practical needs may ultimately outweigh lingering legal uncertainties. • Convertible loan agreements do not require notarisation if they are entered into not only by the lender and the company, represented by a managing director, but also by the share - holders. In contrast, if the convertible loan agreements have been concluded only by the lender and the company, but without the shareholders, then these agreements require a notarised shareholders’ resolution author - ising the managing director, as well as the
corresponding registration of this authorisa - tion resolution with the Commercial Register. The notarisation requirement arises when lenders are subject to mandatory conversion conditions or must comply with shareholders’ agreements setting out relevant obligations (eg, drag-along rights). • Preferred stock is a form of equity that includes specific rights or privileges not afforded to common stockholders typically by means of a company’s shareholders’ agree - ment. In Germany, (non-participating) liquida - tion preferences and weighted-average anti- dilution provisions are mostly negotiated as a means of downside protection, while cumula - tive dividends are typically not addressed. • Multiple voting shares (so-called “founders’ shares/dual-class shares” ) are equity shares with voting rights of up to 10:1 introduced by the Future Financing Act ( Zukunftsfinan - zierungsgesetz ). They are intended to help founders retain their influence on the compa - ny despite raising capital, and have yet to find broad-based adoption in the German start-up landscape. • Virtual (employee) stock option plans (VSOPs), which embody cash-settled and contingent claims of the holder against the company, are widely utilised in the German market. They are considered more straightfor - ward and flexible (and may entail tax benefits) when compared with physically settled stock options or shares held in escrow/subject to reverse vesting conditions. Restricted stock units (RSUs), performance shares and other instruments are less frequently encountered, although German corporate law in a GmbH conceptually permits significant flexibility. 3.4 Documentation Although there are no universally accepted standard documents for financing rounds in Ger -
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